Rescue Your Home from Foreclosure with Chapter 13

Unemployment, medical debts, and divorce: are three of the most common causes of bankruptcy. It doesn’t take much for one of these issues to shatter the American dream. Once you’ve gotten behind two or three payments on your mortgage, it may seem next to impossible to even think about getting caught up.

Mortgage companies won’t let you go long before they start talking foreclosure. When they do, you might think you are out of options, but in fact, you have a very powerful tool available to you under federal law.

Chapter 13 is a type of bankruptcy that many people have used to save their homes, cars and other assets. The distinguishing feature of Chapter 13 is its payment plan. The plan is similar to debt consolidation, only better. When you file Chapter 13, you have the power and the protection of federal law on your side. Let’s look at how Chapter 13 protects, and how it puts you, rather than the mortgage company, in the driver’s seat.

The Automatic Stay Can Stop the Foreclosure

From day one of your case, the federal Bankruptcy Code will stop creditors from continuing their attempts to collect your debts. The injunction that goes into effect when you file your case is called the automatic stay. The stay is an extremely powerful tool that stops most collection activity, including foreclosure, repossession, garnishment, lawsuits, telephone calls, and demand letters. It will remain in effect during the case as long as you are making your Chapter 13 payments, house and car payments, and covering your domestic support obligations like alimony and child support. Your mortgage creditor will not be able to initiate or restart the foreclosure while you’re in a Chapter 13 plan unless you default on your plan payments or your mortgage payments and the creditor gets the permission of the bankruptcy judge.

The Chapter 13 Repayment Plan

A Chapter 13 repayment plan will last 36 to 60 months. During that span, you will use the payment plan to do several things. If you owe a lot of past-due mortgage payments, you can include that arrearage amount in the payment plan. You will also have to make your regular monthly mortgage payments while you are in Chapter 13, but the past due amounts are paid off a bit each month over the life of the plan. When you emerge from Chapter 13 with your discharge, your mortgage will be up-to-date as long as you’ve kept up with your regular payments. That is the goal of most clients who file Chapter 13.

Even if you do not intend to stay in the house long term, filing a Chapter 13 case can be a good strategy. The automatic stay will block the lender’s attempts to collect and will give you some breathing space to figure out your next moves. You may decide that your best course is putting the property on the market. You might also consider applying to refinance your mortgage, obtain a reverse mortgage (for eligible borrowers 62 or older) or applying for a home loan modification.

You can also include other home-related debts in your payment plans, such as property taxes, homeowner association dues, and even material and income tax liens.

Staying Current on Regular Monthly Mortgage Payments

You will pay your mortgage arrearages over time in Chapter 13, but you must pay your current monthly mortgage payments on time starting with the first due date after you file your case. You are required to keep your regular monthly mortgage payments up to date during the entire course of Chapter 13. There are consequences if you fail. First, the mortgage company can petition the court to lift the automatic stay. If the court grants that motion, the lender will be free to start foreclosure proceedings. Second, if your mortgage payments are behind when you complete all your Chapter 13 plan payments, the court will not grant your discharge.

Eliminate Second Mortgages

Chapter 13 also contains another useful tool if you have more than one mortgage and your property is worth less than you owe. Many people found their homes lost value during the recession of the last ten years. If your home has lost so much value that it is worth less than the first mortgage, there is no value to secure any other mortgage. The second or even third mortgage can be eliminated in a Chapter 13 case. The process is called lien stripping, and it can only be accomplished in a Chapter 13 case. Your attorney must file a motion with the court to strip the lien, and you must obtain a discharge. If your case is dismissed or closed without a discharge, the lien will remain in force.

In summary, Chapter 13 can be your strongest option to protect your property from foreclosure and give you a second chance to bring your mortgage current.

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